The Backsplash From the Facebook IPO Bellyflop
Facebook’s share price has finally had a decent day, rising modestly to 29.60 on May 31. But it has trended steadily downward in its first two weeks as a public company, sinking in inverse proportion to the number of questions being asked about what it all means. Will Facebook stock, first hobbled by the Nasdaq’s technical difficulties and then humbled by dawning pessimism about the company’s moneymaking challenges, affect Silicon Valley’s vibrant innovation ecosystem? Will it puncture the optimism bubble?
A few recent stories point to new evidence of a Facebook-inspired slowdown in initial public offerings, but evidence thus far is scant. (Exhibit A is Kayak.com, a travel-search site that delayed its IPO, but the company has been trying to go public for two years.) The more significant impact is likely to be measured in slight changes to the psychology of Silicon Valley. For the past few years, venture capitalists have easily awarded billion-dollar valuations to unproven companies that coat themselves in the varnish of “social” and “mobile.” With Facebook bellyflopping, at least for now, that becomes a bit harder to do.
Fab.com, a members-only, design-oriented, e-commerce site, is currently in the process of raising $100 million at a vigorous pre-money valuation of $700 million, according to two venture capitalists who looked at the deal, thought it was too rich, and passed. Atomico Ventures, a European VC firm created by the original founders of Skype, is putting in $50 million, and the startup is now in the process of completing the round, according to the VCs. The skepticism—at least among the VCs who passed—stems from the size of the deal and the fact that Fab expects to use the cash to expand into new countries before getting to profitability, according to one of the venture capitalists. A Fab spokesperson confirms that the company is focused on global growth and says that the round is 20 percent oversubscribed vs. the signed term sheet.
Another data point is AirBnB, the rapidly growing marketplace for apartment rentals, which apparently is now looking to make acquisitions with its stock, according to a venture capitalist who is familiar with these discussions. It values itself at around $2.5 billion, up from a funding round last year at a valuation of $1.3 billion. But negotiations with one target company that prefers cash have gotten complicated, says the VC. When valuations only ever went up, such details didn’t matter. Facebook shows the arrows can turn downward. (AirBnB declined to comment.)
The biggest challenge posed by the Facebook flop may be to the secondary markets, those relatively newfangled exchanges of private company stock. At some point, well-heeled venture capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers might watch Facebook’s share price sink below what they paid for shares from early employees and other investors. At that point, these firms might face uncomfortable questions from their limited partners. I’ve previously written about how these secondary transactions tend to artificially inflate a company’s share price, irrespective of its underlying value. Perhaps losing money on Facebook could spell the end of the secondary market experiment.
All these Facebook-induced frictions are minor, at least for now, and they are accompanied in some quarters by a little bit of relief. If Facebook’s stock had popped—as everyone expected during that more-innocent time a month ago—it might have reintroduced some irrational exuberance and warped investors’ expectations for the next wave of startups. We won’t have to worry about that now.